Abstract
Empirical evidence suggests that the poor spend a larger fraction of their income on gambling than the well to do. This paper shows that “means tests” for public assistance eligibility could supply part of the explanation. Income support programs can distort private budget sets, conceivably leading to risk-taking behavior on the part of rational agents with standard, concave utility functions. Latter sections of the paper employ a calibrated life-cycle saving model to study resulting demands for actuarially fair lotteries numerically. The analysis demonstrates that allowing lotteries can simplify model-related computations a great deal.Journal of Economic LiteratureClassification Numbers: E21, D91, I38.
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